Question

on. The necessary REQUIRED INVESTMENT Tannen Industries is considering an expansion. The ner equipment would be purchased for $18 million, and the expansion would require additional $2 million investment in net operating working capital. The tax rate is 400 a. What is the initial investment outlay? b. The company spent and expensed $20,000 on research related to the project last year. Would this change your answer? Explain. c. The company plans to use a building that it owns to house the project. The building could be sold for $1 million after taxes and real estate commissions. How would that fact affect your answer?

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Answer 1

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? v 1 ENG 00-13 04-03-2020 24 X GW21 GT X GU fix GV GW GX GY GZ HA HB HC HO HE HE HE TANNEN INITIAL INVESTMENT OUTLAY COST OF EQUIPMENT (AFTER TAX) NET OPERATING WORKING CAPITAL 18000000 2000000 20000000 ANSWER ANSWER ANSWER No, last year's expenditure is considered a sunk cost and does not represent an incremental cash flow. Hence, it should not be included in the analysis. ANSWER WILL NOT CHANGE The potential sale of the building represents an opportunity cost of conducting the project in that building. Therefore, the possible proceeds after taxes and commissions must be charged against the project as a cost INITIAL INVESTMENT OUTLAY WILL INCREASE BY 1000000 ... IRRnpvbeta HPR GMAM EAC MACRS RELEVANT NPV BETA LEVERED REPLACEMENT BOND OPTION TO WAIT STEIN indiffEPS EBIT LEASE SLM G... ►